Will the ECB increase asset purchase in 2016?

FXStreet (Mumbai) - Inflation in Eurozone has stayed too low for way to long. Currently, inflation is just 0.2 per cent and has been below 1 per cent for more than two years. The ECB on 3rd December had slashed deposit rate by 10 basis points on 3rd December, along with extending the current QE programme to March 2017. It also said it would reinvest the principal payments on the securities purchased to support liquidity conditions. The markets were however not satisfied as the central bank delivered less than it had promised.

The central bank disappointed the markets as it did not expand the amount of bonds purchased under QE programme. The ECB chief Mario Draghi had on 14th December assured markets that the central bank would do all that it takes to push up price pressures in the euro zone. He stressed that there was no limit to the tools that could be used to push inflation towards the 2 per cent target. He said "If the ECB had to intensify the use of its instruments to ensure that it achieves its price stability mandate, it would".

An annual Financial Times poll of eurozone analysts however forecast no further easing action though Draghi has repeatedly stressed that ECB will act if inflation and growth across in the bloc continued to lag. Economists doubt if the ECB will increase the size of its €1.46tn asset-purchase programme in 2016.

Dario Perkins, chief European economist at Lombard Street Research does not see another easing wave unless “something goes wrong in the wider global economy”. Jonathan Loynes, chief European economist at Capital Economics also believes that the ECB will be under pressure to move only if the “economic recovery remains sluggish and inflation low”

Half of the 33 respondents in the poll believe the ECB will not further ease in 2016. The remaining respondents believe that the ECB will either expand QE or cut interest rates. Some of the economists who feel that the ECB will act however feels the central bank will most likely not introduce major changes to its existing policy stance.

ECB forecast the Eurozone to grow 1.7 per cent in 2016 after hitting 1.5 per cent growth in 2015 helped by its QE programme. However, the economists in the annual FT poll expect higher inflation and slightly higher growth rates in 2016.

ECB’s easing policy has already added a €600bn in its balance sheet which now stands at €2.8tn. 24 out of 28 respondents polled by the FT opine that the ECB’s balance sheet in 2016 will stay between €3tn and €4tn. This increase will be the outcome of the extension of the QE programme to March 2017. The central bank on 3rd December committed to buy €60bn in bonds each month until March 2017 under QE.

Economist Loynes however feels that US Fed’s decision to increase rates might compel the ECB to speed up its QE programme. The Fed’s decision will likely put upward pressure on eurozone bond yields pushing the ECB to increase the pace of its asset purchases “to prevent that from damaging growth prospects.”

Some respondents in the poll were of the opinion that loose monetary easing alone would not help to prompt sustainable recovery. Economists argued that stronger measures from politicians such as economic reforms will be needed along with supportive policy to spur faster growth. George Magnus, senior economic adviser to bank UBS rightly said “it is questionable whether any of the policy options open to the ECB have any relevance for the main factors holding back eurozone growth and demand — ie, absent supporting actions from the fiscal and budgetary authorities.”
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